Broad Federal Policy Favors Arbitration Agreements, Can Extend to Non-Parties

With the Supreme Court last year strengthening the case for the arbitratrion of non-compete disputes, count me in as one who is fairly confident we're going to see businesses utilizing such clauses more in employment and personal services agreements.

Which begs the question...To what type of non-contract claims does the clause apply? And are third-parties bound?

The answer to the first question is generally fairly straightforward. The federal policy (expressed in the Federal Arbitration Act) generally pushes strongly in favor of arbitration, with courts resolving doubts about scope towards arbitrability.

What does this mean in practice? Let's take an example. Assume a clause provides for arbitration of claims "arising out of" the employment relationship. Then, it seems fairly clear that not only would a non-compete violation be arbitrable, but so would a common-law claim for breach of the duty of loyalty (or a statutory claim like trade secrets misappropriation). So, too, would a claim for violating my least favorite statute, the Computer Fraud and Abuse Act (as recently decided in Torbit, Inc. v. Datanyze, Inc., 2013 U.S. Dist. LEXIS 19584 (N.D. Cal. Feb. 13, 2013)). The general test is pragmatic and consistent with the scope of the FAA's reach: claims having a significant relationship to the contract are arbitrable.

The second question isn't quite so simple. To whom does it actually apply? In non-compete cases, it is very common for a business to sue a former employee's new company, most frequently on the theory it has interfered with an employment covenant and induced a breach. Does a broad arbitration clause apply? Or can a business split its claim, one against the employee in arbitration and one against the new company in court.

A non-party can compel arbitration because estoppel principles generally preclude one party (i.e., that seeking to enforce the contract) from asserting the benefits of the agreement while disclaiming other burdens under the agreement. Generally, if the claim against a non-party derives from the agreement itself, then the non-party can compel arbitration. Put differently, if the conduct of the non-signatory is substantially intertwined with the conduct of the signatory, a court's going to compel arbitration.

The relatively easy cases involve interference with contract (the non-compete covenant), because without the contract term, there's no tort. The closer cases for arbitration involve other torts that may exist independent of the contract. For instance, a business may have a dispute against an employee for violating his employment agreement, and may join into that case a dispute against the individual's current employer for deceptive trade practices (such as impermissible disparagement of a competitor's goods or services). If that's the only claim asserted, and there's no logical tie-in to the employment contact, the non-signatory may have a difficult time getting standing to compel arbitration.